Most expats are aware of the 30 percent tax ruling and the fact that it is the most attractive tax break available to them when they come to work in The Netherlands. However, there is an array of rules surrounding the expatriate tax facility and this article is an attempt to bring them together and clarify them.
What is the 30% Ruling?
The 30%-reimbursement ruling is a tax facility for foreign employees working in the Netherlands. If a number of conditions are met, the employer is allowed to grant a tax free allowance amounting to 30% times 100 / 70 of the gross salary subject to Dutch payroll tax. This results in a maximum (effective) tax rate of approximately 36.4% (i.e. the top income tax rate of 52% times 70%). This tax free allowance is considered to be a compensation for expenses a foreign employee may incur for working outside his home country.
What Conditions need to be met?
In order to be eligible for the ruling the following (cumulative) conditions have to be met:
1. The employee has to work for an employer due to withholding Dutch wage tax;
2. Employer and employee have agreed in writing that the 30%-ruling is applicable;
3. The employee has to be transferred from abroad to a Dutch employer or has to be recruited from abroad by a Dutch employer;
4. The employee must not have lived within 150 km of the Dutch border for 16 or more months out of the last 24 months prior to the start of the Dutch employment (this particular point is currently under review by the European Court of Justice to determine whether or not it is in breach of free movement of labour rules);
5. The employee has to have specific experience or expertise which is not widely available in the Netherlands, for example specialists in a specific line of business;
6. The gross salary is more than €4,372 (including holiday pay) per month for migrants over the age of 30 and €3205 (including holiday pay) per month for those under 30.
Looking at each condition in turn:
1. In order to be eligible for the 30% ruling, you have to be employed. Therefore for those who are self employed it will not be possible to claim the 30% ruling. However, if you set up a Ltd company or Dutch BV and become an employee of your Ltd company or Dutch BV, you are considered to be in an employment situation and consequently could be eligible for the 30% ruling.
2. The application for the 30% ruling has to be done by both employer and employee. If the 30% ruling applies the gross salary of the employee will be reduced by 30% for tax purposes. This will most likely also have implications for your potential unemployment benefits or disability benefits since these benefits are based on your taxable salary. Therefore, the tax authorities require that both employer and employee are aware of these consequences. This agreement in writing can be done by means of a clause in the employment contract or otherwise as a schedule to the contract.
3 & 4. It is only possible to claim the 30% ruling when you are transferred from abroad. You have to prove that you were residing abroad before you came to the Netherlands for the job. There has been a lot of case law about this condition. The employer has to state by means of a letter of recommendation to the tax authorities the reason why he hired the employee and what makes the employee so special for the company. The employer may be asked to prove that he did not succeed in finding an employee with comparable expertise in the Netherlands. Furthermore, the employee must not have lived within 150 km of the Dutch border for 16 or more months out of the last 24 months prior to the start of the Dutch employment.
5. The employee has to have specific skills that are scarce on the Dutch labour market. These specific skills are determined on several aspects such as salary, age, employment history, education and level of your employment. None of these aspects are conclusive; it is the combination of all aspects that will determine your specific skills.
6. The gross salary has to be at least EUR 4,372 per month. However, a lower salary of EUR 3,205 is applicable for those who have completed a Master’s degree and who are younger than 30 years. Furthermore, for scientific researchers, employees working in scientific education or doctors in training, there is no “minimum salary” requirement.
What does it mean in Money Terms?
The salary you agreed on will be reduced by 30%. In return you will receive this 30% reduction as a reimbursement for expenses (As if you had incurred expenses for your employer and being reimbursed for them tax free). This is the most common way since it will not influence the salary burden for the employer. However, the employer is not obliged to give the advantage of the ruling to the employee and it happens occasionally that the employer partially or fully take the benefit from the ruling.
What is “Salary” for the Purposes of the 30% Ruling?
This has been a major discussion point over the last few years. Of course, your gross salary is considered to be salary, but what about your bonus, holiday allowance, company car, redundancy settlement or any other benefits in kind?
Basically, your entire taxable salary that can be allocated to your current employment is a part of the 30% ruling. There are some different regulations regarding pension premiums but your bonus, holiday allowance, benefits in kind and company car fall under the 30% ruling. A court decision turned out that severance payments do not fall under the 30% ruling since these payments can be considered to be more of a compensation for loss of future salary and therefore not linked to your current salary. If you are made redundant, it is therefore important to have a breakdown of the redundancy package so it can be determined which part of the package can be considered to be payment of your bonus and outstanding holidays and which part is the actual severance pay so you can check if the 30% ruling was correctly taken into account.
Does it affect the Annual Tax Return?
Under the 30%-ruling you can opt for “partial non-residency status”. When you have this you are automatically considered to be a non-resident tax payer in Box 2 and Box 3, in spite of the fact that you are living in the Netherlands. For Box 1 income you are considered a resident tax payer. Therefore you do not pay income tax on assets in Box 2 and 3 (except for real estate in the Netherlands and substantial shareholding in a Dutch resident B.V.).
Time Periods and Deadlines
The 30% ruling will become effective retroactively when the application is submitted within 4 months after the commencement of your employment contract. If the application is submitted after 4 months, it will become effective as of the first day of the month following the month of application.
The maximum duration of the ruling is 8 years and will be reduced with periods you have stayed in the Netherlands.
If you change jobs, it is possible to reapply for the ruling, provided that you still meet the conditions regarding specific skills and you start this new employment within 3 months after terminating the previous one.
Can the Ruling be applied for employees already in The Netherlands?
If you are eligible you can still apply for the ruling but the tax authorities will reduce the total duration of the ruling with the period that you have already resided in the Netherlands.
Written by Brian Daly, Compliance Consultant www.crescenzi-consulting.com
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